By Sarah Krouse
BlackRock Inc. has started a shake-up of its stock picking
business, relying more on robots rather than humans to make
decisions on what to buy and sell.
The firm has become the world's largest asset manager, with $5.1
trillion in total assets, in large part because of its dominant
position in low-cost, passive investment such as exchange-traded
funds.
But its stock-picking unit - which depends on money managers to
choose investments - has lagged rivals in performance and clients
have been withdrawing their money.
The company has taken the view that it is difficult for human
beings to beat the market with traditional bets on large U.S.
stocks. So the firm on Tuesday announced an overhaul of its
actively-managed equities business that will include job losses,
pricing changes and a greater emphasis on computer models that
inform investments. Seven stock portfolio managers are among
several dozen employees who are expected to leave the firm as part
of the revamp, a person familiar with the matter said.
The firm is offering its Main Street customers lower-cost
quantitative stock funds that rely on data and computer systems to
make predictions, an investment option previously available only to
large institutional investors. Some existing funds will merge, get
new investment mandates or close.
The changes are the most significant attempt yet to rejuvenate a
unit that has long lagged behind rivals in performance. Clients
have pulled money from the actively managed stock business in three
of the past four years even as BlackRock's total assets climbed to
a record $5.1 trillion. BlackRock had $275.1 billion in active
stock assets under management at the end of December, down from
$317.3 billion three years earlier.
The author of the company's new strategy is former Canada
Pension Plan Investment Board Chief Executive Mark Wiseman, who was
hired last year to turn around the stock-picking business. The
effort is the first test for Mr. Wiseman, viewed by some company
observers as a potential successor to Chief Executive Laurence
Fink.
Mr. Wiseman -- who spent his first six months examining the
strengths and weaknesses of the business with staff, consultants
and clients -- said the firm is trying to play offense as smaller
rivals struggle.
"We're in really rough seas, but BlackRock is an aircraft
carrier," Mr. Wiseman said. "Everyone else is in dinghies, and
they're bailing like hell."
Many other firms that specialize in handpicking stocks are also
struggling with low returns and shifting investor tastes. Since the
2008 financial crisis, clients across the money-management industry
have moved hundreds of billions of dollars to lower-cost funds that
track indexes, known as passive investment funds, instead of aiming
to beat the market.
BlackRock has also benefited from investors' embrace of
passively managed investments. The amount overseen by the entire
firm has been bolstered by its exchange-traded-fund business, which
comprises about a quarter of all assets under management. It also
sells investment and risk-management technology, giving it a
broader mix of businesses than many of its rivals.
The effort to improve the performance of BlackRock's
stock-picking unit isn't the first but goes further than past
changes. In 2012, BlackRock replaced management teams of some of
its largest stock funds and analyzed the investment process of each
team.
Yet by the end of last year more than half of the assets in
BlackRock's traditional actively managed stock products
underperformed their benchmarks or peers over one year, up from
less than a quarter a year earlier, according to the company's
earnings report. Over three years, 38% underperformed, compared
with 40% at the same time in 2015.
Under Mr. Wiseman's plan, BlackRock will change the investment
mandates of some funds and focus on a slightly smaller lineup of
stock products that includes nine quantitative funds that will be
available to individual investors. In some cases, those funds come
at roughly half the cost of those they replace.
The firm will also run country- and sector-focused stock
products in which executives believe they can outperform, funds
that pursue specific outcomes such as social impacts, and riskier
funds that make more concentrated bets. The changes weed out
actively managed stock funds that closely follow indexes.
The planned price cuts involved in creating that lineup will
result in a loss of $30 million in revenue annually, the firm said.
The firm will take a $25 million charge in the first quarter to
fund layoffs, staff relocations and research investments.
San Francisco will become the firm's hub for quantitative
investing, and some emerging-markets staff will move to Asia from
London. Another change, Mr. Wiseman said, will be a better
integration of research and data informing both traditional and
quantitative stock picks.
Despite immediate job cuts, executives said that, 18 months from
now, the firm will have roughly the same number of staff in the
unit because it will continue to hire people as needed.
Executives acknowledge potential risks from the staffing and
fund changes. Too much manager turnover at funds can spook
customers and trigger withdrawals. And changing fund mandates can
lead clients who want what they initially signed up for to head for
the exits.
But executives said the planned moves will better position the
business to be competitive longer term and take advantage of
BlackRock's scale.
"We should be acting like BlackRock, not a part of BlackRock,"
Mr. Wiseman said.
Write to Sarah Krouse at sarah.krouse@wsj.com
(END) Dow Jones Newswires
March 29, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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